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There's trouble in Tokyo

A massive national debt. Withered stock prices. A shrinking work force. Japan's problems have pushed it to the brink, its stock market chief says

MARCUS GEE

Thursday, May 01, 2008

TOKYO — If you want a pep talk about the Japanese economy, don't go see Atsushi Saito.

The head of the Tokyo Stock Exchange doesn't hold back when a Canadian visitor comes by his office expecting a simple rundown on the Japanese markets. Japan, he says, is walking toward the edge of a cliff. Unless it changes direction, the world's second-biggest economy faces financial ruin.

In an hour-long interview, Mr. Saito painted a grim picture of a country with a crushing national debt, a diminished stock market, a shrinking, aging work force and a ruling class too blinkered to learn from its mistakes.

Mr. Saito worked on Wall Street in the 1970s and remembers when New York faced bankruptcy. “We are in the same situation,” he said. “We are the City of New York.”

The difference is that New York had the U.S. government, which, after first refusing, helped rescue it from bankruptcy. “We don't have any Washington,” he said. So unless something changes, “we will have to sell our country to someone else.”

Mr. Saito's comments come at a time when Japan's economy has been enjoying a modest rebound after years of trouble, growing by about 2 per cent a year for four years. But in its twice-yearly forecast Wednesday, the Bank of Japan lowered its growth forecast to 1.5 per cent for the year ending next March.

Mr. Saito said Japan's long-term problems are severe. The markets he presides over as president of the Tokyo exchange mirror the fall in Japan's fortunes, he said.

At the peak of Japan's boom years in the 1980s, he recalled, the combined worth of the stocks on the Tokyo exchange was $6-trillion (U.S.). The figure for the New York exchange was 30 per cent lower.

Today, Tokyo's market capitalization is about $4-trillion and New York's is five times that. China's stocks, meanwhile, are worth 150 times what they were in 1989. Combining the markets in Shanghai, Shenzhen and Hong Kong, he said, the value of the Chinese markets now exceeds Japan's, still rated second in the world by market capitalization.

“Our market has really lost its position in the world,” he said, reclining in a brown leather chair in his spacious office in the fortress-like exchange building. “This is a kind of warning to Japan from abroad.”

In the industrialized world, only Italy's stock market performed worse than Japan's last year.

A second problem, he said, is Japan's immense national debt, which has climbed to 11/2 times its gross domestic product, the highest rate for an industrialized country. Throughout the “lost decade” that followed its 1989 market crash, Japan used floods of public money to try to spend its way back to economic health.

It has funded that debt partly by issuing bonds. In the next 30 years, Mr. Saito said, the government will somehow have to redeem $5.7-trillion worth of those bonds, a sum greater than Japan's current annual GDP.

“And we have to do this with an aging society and a shrinking work force,” he said. “How can we really redeem this debt – unless we raise productivity and economic growth.”

To do that, he said, Japan's conservative-minded business and political leaders will have to open the country to the world as never before, taking down many of the barriers to competition and investment that have made it what he called the “Galapagos of the world” – an isolated economic ecosystem.

Japan, he noted, has the world's most advanced cellphones, capable of delivering TV shows and paying for things at stores. But because they are on the unique Japanese protocol, incompatible with the rest of the world's, Japan has not been able to sell them abroad, missing out on the explosive growth in cellphone use in neighbouring China and other emerging economies.

“We should open the door,” he said. “We need to be much more internationalized.”

Japan's accepts a pathetic amount of foreign investment, he noted – 2.5 per cent of gross domestic product as of 2006, compared with 47 per cent for Britain or 33 per cent for France.

Such views are unpopular among Japanese nationalists and the powerful anti-reform elements of the long-ruling Liberal Democratic Party. Mr. Saito said they dismiss him as “that noisy guy.”

They say to him: “You always side with foreigners. Are you really Japanese?” he said.

But he insists he is a fierce patriot who is only trying to head off a catastrophe by speaking up. During New York's bankruptcy crisis, he remembers seeing people lining up on the street to get their money back on city bonds. The sight made a deep impression.

“Unless we open the door, unless we co-operate with foreign friends, we will repeat the history of the City of New York,” said Mr. Saito (pronounced sigh-toe), a genial man with a broad face and a wave of grey-white hair. “Our sons or grandsons will face disaster.”

Mr. Saito said that, with good pensions and health care and a still-high standard of living, Japanese have been protected from the realities of their country's economic troubles. “We are isolating ourselves from the problem. But the reality is that we are standing on junk paper: debt.”

He said he is dismayed that many Japanese leaders still talk as if Japan was No. 1, as it seemed to be back in the 1980s.

“I remember the same sort of talk before the war: ‘We are No. 1,'” he said, referring to the hubris of Japan's leaders in the runup to the attack on Pearl Harbour. “We haven't learned anything.”

Mr. Saito was appointed president of Tokyo Stock Exchange Inc. last June. A former vice-president of Nomura Securities Co., he was fresh off a tough assignment as head of the state-owned Industrial Revitalization Corp. of Japan, set up to help restructure troubled Japanese companies.

He is 69, well past retirement age, and he said retired friends are always urging him to come out and play golf on weekdays. He said he feels obliged to stay at his post, working for reform despite the taunts of those who dismiss him as a servant of foreigners.

“I don't care,” he said. “I don't have long to live and I want to do this for my country.”

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